Rice market is heating up

Traders work on the Agricultural Trading Floor during the first official trading day at the new CME Group at the Chicago Board of Trade building in Chicago, Illinois. - Jeff Haynes/Getty Images

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TESS VIGELAND: With stocks and bonds down in the dumps, commodities are on the top of investors' lists these days. Today's best example: oil. It set yet another price record, more than $106 a barrel. Other high-fliers include wheat and copper and rice. Rice generally isn't a big deal here in the US. We produce less than two percent of the world's supply. Of that, only about a fifth is traded on a commodities exchange. But our little rice market is getting a lot of attention. And that has serious implications for countries where rice is an essential part of the food supply.

From WBEZ in Chicago, Adriene Hill reports.

ADRIENE HILL: When it comes to commodities trading, rice is a niche market. You only need to look at the size of its trading pit. It's a small part of the floor of the Chicago Board of Trade. A really small part, the pit's just ten feet by ten feet.

John Casey: There aren't that many of us. There's only ten guys and we don't need that much space. We're all pretty slim so...(laugh)

John Casey is the chairman of the rice pit committee. He's been trading rice since 1988. Back then a hundredweight of rice cost just $4. Last year Casey traded it at $10.50. Today...

Casey: Could you hold on one second?

Casey makes a trade at more than $16 a hundredweight. When the price of anything rises this high, this fast, investors take notice. With some parts of the bond market frozen, and the economy slowing, they want to find new places to put their money. Commodities like wheat, soy and corn are in high demand now. Rice too, but the market's so small, that most people ignore it. Casey says that's created an opening for some adventurous investors, with hedge funds leading the way.

Casey: They have been extremely active. Some of these markets have doubled in price in the last two years. Many of these speculative hedge funds that look for those price swings have been in on this unbelievable historic rally.

Dave Lehman: We used to try to achieve about 1,000 contracts a day in the rice market. And now we're frequently trading 2,000-3,000 contracts per day.

Dave Lehman is the director of commodity research at the CME group. He says those contracts are agreements to buy or sell rice at a future date. More contracts mean more money, which keeps the system well-oiled, Lehman says.

Lehman: When that liquidity grows then the market is more efficient. Hedgers who need to use the market to manage their risk are able to enter and exit the market more efficiently at a lower cost as this liquidity expands.

There is a downside to all that money sloshing around the market -- it can push prices artificially high. James Barnett is a grain analyst with MF Global research. He says hedge funds and other investors are indulging in speculation

James Barnett: And prices are higher than current supply demand tells you they'd be. But there is a good reason for it, the speculative buying reflects what we're seeing in the big picture.

These speculators think rice prices will keep rising. They're betting on a weak dollar, competition with other crops for land, tightening global supply and rising demand. There's no law against making that bet, but there's only so much investment the fledgling market can handle.

James Barnett: The thing to remember for rice is again it's a small market in the US. It definitely provides opportunities to trade but it can only absorb so much speculative interest before it quits functioning as an active market reflecting real prices in the real world.

The danger is prices on the exchange could spike. Chicago's rice market is used as a price benchmark around the world.
So inflated prices here could hurt countries that depend on rice as a primary food source.